Are the markets beginning to realize fiscal spending and the debt levels are unsustainable? FRB Chair Powell stated recently “the game was slipping away from him” as longer dated yields surged to 16–17-year highs.
Powell stated, “the recent moves in yields may have almost nothing to do with the Fed and everything to do with fiscal policy.”
Based upon above the comment, the 10-year Treasury may not have pushed up against 5% because of anything that the Fed said (or intends to do).
In addition, it did not breach 5% because either economic or inflation data was “so hot.” It did not break 5% because China is not buying or being long rates is a crowded trade.
One conclusion that can be made: it broke 5% because no one knows what DC is going to do and the bond market is starting to acknowledge this. The market is also starting to believe the Fed has joined the group of people who now realize that whatever is going on in rates (which in turn is driving equities) is largely a function of DC.
Frightening given that 2023 is a year when the economy exceeded almost everybody’s expectations as the underlying federal deficit roughly doubled, spotlighting a dire fiscal trajectory likely to worsen given the partisan battle in Washington.
According to CBO, the government ran a $2.02 trillion deficit for the fiscal year through September after adjustments to remove the President’s student loan forgiveness program. The gap is $1.02 trillion more than the prior year.
Tomorrow, preliminary 3Q23 GDP is released and growth is expected to be around the top five quarters of the millennium. How will the data impact public sentiment and outlooks?
Speaking of outlooks, yesterday several global manufacturing indices were released. All were over 50, which suggests the global and domestic economies are still in expansionary mode. How is this possible with the most aggressive monetary policy in history?
And then there is the geopolitical landscape. Will Washington suddenly wake up and realize the greatest threat to the world is not climate change. There are many examples when a struggling executive branch (or any other government) looks outside their borders to distract their population from the issues at home.
Commenting about earnings, profits have exceeded expectations and there is a general lack of commentary that inflation—either cost push or demand pull—had greatly impacted results. Concern is elevated but thus far the impact is not overly significant. The forward-looking statements are cautionary given the near universal opinion that the economy will finally slow down after the third quarter.
As noted above, the PMIs suggest a different environment.
After the close both GOOG and MSFT posted results. MSSFT exceeded expectations, sending shares higher by around 2%. GOOG disappointed and shares are lower by 7%.
Last night the foreign markets were mixed. London was down 0.11%, Paris down 0.46% and Frankfurt down 0.39%. China was up 0.40%, Japan up 0.67% and Hang Seng 0.55%.
Dow and NASDAQ futures are flat and down 0.80%, respectively. The 10-year is up 2/32 to yield 4.84%.
